The Colonial Mutual Life Assurance Society Limited, in the matter of The Colonial Mutual Life Assurance Society Limited [2020] FCA 1809

Federal Court of Australia|2020-12-16|Before: Gleeson J

Background to the proposed scheme 8 CMLA is currently ultimately wholly-owned by Commonwealth Bank of Australia (CBA), a company listed on the Australian Securities Exchange. CMLA is registered as a life company under s 21 of the Act. CMLA has six statutory funds in respect of its life insurance business within the meaning of the Act. 9 AIAA is ultimately wholly-owned by AIA Group Limited, a company listed on the Stock Exchange of Hong Kong. AIAA is also registered as a life company under s 21 of the Act. AIAA provides life insurance coverage to over 2.9 million people in Australia and employs approximately 1,200 people in Australia. AIAA currently has two statutory funds within the meaning of the Act. 10 On 21 September 2017, CBA announced the sale of its life insurance business in Australia, including CMLA, to AIA Group Limited. In parallel with a planned share sale of CMLA, which has been the subject of regulatory approval delays relating to the disposal by CMLA of its 37.5% stake in BoCommLife Insurance Company Limited, CBA and AIA Group Limited (through AIAA) have sought to implement an alternative approach to completing the divestment of CBA's life insurance business. This has involved: (a) the entry by CBA, AIAA and CMLA (among other entities) into a joint cooperation agreement to jointly manage AIAA's and CBA's life insurance businesses, including CMLA (Joint Cooperation Agreement). The Joint Cooperation Agreement became effective on 1 November 2019; and (b) CBA, AIAA and CMLA working towards implementing the scheme. 11 Mr Moss's evidence was that, under the terms of the Joint Cooperation Agreement, AIAA exercises an appropriate level of direct management and oversight of CBA's life insurance business, including the ability to appoint a majority of the directors to CMLA. In practice, AIAA currently operates CMLA's business jointly with its own life insurance business, and shares business functions, including actuarial teams, across the two businesses. 12 AIAA (along with CBA, CMLA and the other parties to the Joint Cooperation Agreement, where required) received approval to enter into the Joint Cooperation Agreement from the Commonwealth Treasurer on or around 30 October 2019 under the Financial Sector (Shareholdings) Act 1998 (Cth), the Insurance Acquisitions and Takeovers Act 1991 (Cth) (IATA), and s 74(2) of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). 13 By decision dated 30 October 2020, the Treasurer made an unconditional decision pursuant to s 41 of the IATA that the Commonwealth Government has no objection to the proposed scheme. 14 By letter dated 2 November 2020, the Australian Government informed Ashurst that the Commonwealth has no objection to AIAA acquiring up to a 100% of the interest in the assets of the life insurance business conducted by CMLA, subject to certain conditions imposed under s 74(2) of the FATA.

Overview of proposed scheme 15 The proposed scheme is set out at annexure D to the originating application. The applicants summarised the effect of the scheme as follows. (1) all policies of CMLA, as well as all assets of its statutory funds (other than the CMLA's interest in BoCommLife and certain other assets specified in annexure D), will be transferred to AIAA; (2) AIAA will assume all of the liabilities and obligations of CMLA in relation to its transferring business (other than liabilities relating to CMLA's interest in BoCommLife and certain other liabilities specified in annexure D) and be entitled to all the rights and benefits of CMLA in relation to the transferring business; (3) AIAA will become the issuer of CMLA life insurance policies and CMLA policy owners will become AIAA policy owners; (4) the rights and liabilities of CMLA policy owners will be the same as they would have been if the applications on which their policies were based had been accepted by AIAA instead of CMLA and their policies had been issued by AIAA instead of CMLA; and (5) any person having a claim or obligation to CMLA under or in respect of a CMLA policy will have the same claim on or obligation to AIAA irrespective of when the claim or obligation arose. 16 In summary, the applicants submitted: (1) CMLA's three statutory funds containing investment-linked policies (known as Statutory Fund No. 1L, Statutory Fund No. 2L and Statutory Fund No. 4) will be transferred as-is to AIAA - in other words, they will become new statutory funds in AIAA; (2) the policies referable to CMLA's other statutory funds (known as Statutory Fund No. 1, Statutory Fund No. 3 and Statutory Fund No. 5), as well as these funds' underlying assets, will be transferred to AIAA's Statutory Fund No. 1 (receiving fund). 17 As set out in cl 13.1 of annexure D, there will be no change to the terms and conditions of the policies of CMLA or AIAA as a result of the scheme, other than: (1) references to "CMLA" will change to be references to "AIAA"; and (2) references to a statutory fund of CMLA will change to be references to the relevant statutory fund of AIAA. 18 As set out in cl 15 of annexure D, all costs associated with the scheme will be paid for by AIAA and CMLA and not by the policy owners of AIAA or CMLA.

Actuarial reports 19 Three actuarial reports have been prepared in relation to the scheme, by Messrs van Koert, Della and Goodsall respectively. Mr van Koert has concluded that the proposed scheme will not materially prejudice existing AIAA policy owners. To illustrate the change to the financial position of AIAA's statutory funds resulting from the proposed scheme, Mr van Koert set out the Capital Adequacy Multiples for the statutory funds as at 30 June 2020 and as at 30 June 2020 if the scheme had been implemented. For AIAA Statutory Fund No. 1, the multiple increased from 142% to 168%. According to Mr van Koert, this improvement is due mainly to improved diversification of risks under the Life and General Insurance Capital prodetnail standard set by APRA, generated by bringing the assets and liabilities of the relevant statutory funds together. 20 Mr Della has concluded that the proposed scheme will not materially prejudice existing CMLA policy owners. Mr Goodsall, the independent actuary, has formed the following opinions based on his review of the proposed scheme: (1) the proposed scheme will not materially prejudice the interests of policy owners of CMLA and AIAA; (2) the security of benefits for policy owners of CMLA and AIAA is maintained; (3) the changes to the contractual references contained in the scheme are necessary to give effect to the scheme and will not adversely affect the contractual rights or benefits of policy owners of CMLA or AIAA; and (4) there will not be any adverse impact on reasonable benefit expectations of policy owners of CMLA and AIAA.

Affected policy owners 21 As earlier noted, an "affected policy owner" is the owner of a policy that is referrable to a statutory fund affected by a scheme. As Allsop CJ explained in Re Macquarie Life Ltd [2016] FCA 973 (Macquarie Life) at [6], statutory funds of this kind separate and ring-fenced operational units of the overall life business of the company. 22 All six of CMLA's statutory funds are affected by proposed scheme. 23 The applicants also accepted that AIAA's Statutory Fund No. 1 is also affected by the proposed scheme, since it is receiving policies under the scheme: cf. Macquarie Life at [25]; Re St George Life Ltd [2018] FCA 1206 (St George Life) at [32]. 24 As AIAA's other statutory fund (Statutory Fund No. 3) is not receiving (or transferring) any policies under the proposed scheme, it will not be "affected" by the scheme within the meaning of the Act. 25 Thus, the relevant affected policy owners are the owners of policies referrable to CMLA's statutory funds and AIAA's Statutory Fund No. 1. 26 A "policy owner" is a person to whom a relevant policy has been issued, or an assignee or transferee of the rights of that person: cf. s 10 of the Act. A person who may have rights under the policy, but is not a person to whom a relevant policy has been issued, or an assignee or transferee of the rights of that person is not a "policy owner": Macquarie Life at [22] and [27]; St George Life at [35]. 27 The applicants have identified the following groups of persons to be "policy owners" for the purposes of the scheme: (1) individuals who hold a current contract for life insurance in their own name; (2) superannuation trustees or employers who enter into policies in their own name for the benefit of members of the funds or employees, respectively (but not the members of the funds or the employees themselves); (3) policy owners who are currently "on claim", that is, policy owners who are being paid a benefit following a claim on a policy they hold; and (4) owners of certain categories of recently lapsed or cancelled policies, being: (a) policies that have lapsed or been cancelled as a result of a failure to pay the required premiums, but that can be reinstated within a particular period if the policy owner resumes payment of their premiums; (b) policies that have paid a trauma or total and permanent disability benefit within the last 12 months, but whose policy owner has an entitlement to 'buy back' or reinstate an amount of life cover; and (c) policies that have lapsed but are the subject of an unresolved dispute or ongoing litigation or remediation program.

Request for dispensation orders 28 In substance, the applicants are seeking dispensation in respect of the requirement to contact the following groups of affected policy owners: (1) owners of policies referable to AIAA's receiving fund; (2) any affected policy owners of CMLA for whom CMLA does not have a current mailing address, or ceases to have a current mailing address after despatch of the approved scheme summary; and (3) any affected policy owners who become owners of CMLA policies after the date of the despatch of the approved scheme summary (new policy owners). 29 In substance, the grounds for the proposed dispensation in relation to these three groups was as follows: (1) The cost of notifying owners of policies referable to AIAA's receiving fund, of whom there are over 250,000, is not justified having regard to the expected positive impact of the scheme on the financial position of the receiving fund. (2) Recent searches show that CMLA currently has mailing addresses for approximately 94.29% of affected policy owners of CMLA. The likely cost of further searches for addresses for the remaining policy owners is not justified having regard to the likely opportunity for similarly affected policy owners to raise any relevant objection. (3) New policy owners are most appropriately informed of the proposed scheme when they receive their Welcome Pack, on entering into a new policy. (4) The applicants propose to carry out other steps to advertise the scheme which, they submit, will be "likely to lead to notification of a very large number of affected policy owners, sufficient to bring forth, in all likelihood any objection to the scheme that is based on viable objective grounds": cf. National Mutual at [42].

Consideration and conclusion 30 The policy underlying s 191(2)(c) is to give every affected policy owner a summary of the proposed scheme approved by APRA, and an opportunity to make submissions to the Court on the application for confirmation of the scheme: National Mutual at [31] and [32]. 31 Matters that have been taken into account in the exercise of the discretion to dispense with this requirement include, relevantly (National Mutual at [34]): (1) the nature of the scheme and whether it involves changes to the contractual benefits or entitlements and security of policy owners in respect of whom dispensation is sought; (2) evidence from qualified actuaries as to whether policy owners in respect of whom dispensation is sought will be detrimentally affected by the scheme; (3) practical difficulties and costs in providing an approved scheme summary to policy owners in respect of whom dispensation is sought; (4) the extent to which the scheme may be brought to the attention of policy owners by means other than the approved scheme summary; (5) the lack of material changes to policy terms and conditions; (6) the involvement and attitude of APRA to the application. 32 However, by s 191(5), the Court may dispense with the need for compliance with s 191(2)(c) in relation to a particular scheme if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that s 191(2)(c) be complied with. 33 I am satisfied that it is not necessary that s 191(2)(c) be complied with, having regard to the evidence that affected policy owners will not be detrimentally affected by the scheme, the absence of any material changes to policy terms and conditions and APRA's satisfaction with the proposed orders. 34 I accept it would be onerous for the applicants to give a copy of the approved scheme summary to AIAA affected policy owners, having regard to the evidence that they are not adversely affected by the proposed scheme. 35 I also accept that it would be onerous for the applicants to be required to give a copy of the approved scheme summary to CMLA affected policy owners for whom CMLA is unable to locate a mailing address through reasonable searches of its own records, where the applicants will give an approved scheme summary to approximately 94% of affected policy owners. 36 I also accept that the proposed orders make appropriate provision for informing new policy owners of the proposed scheme. 37 Finally, I was satisfied that the proposed orders make appropriate provision for drawing attention to the proposed scheme to affect policy owners who will not be given the approved summary in accordance with s 191(2)(c). 38 Accordingly, I made orders in accordance with the proposed orders. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

(Cth), the Insurance Acquisitions and Takeovers Act 1991(Cth)

Life Insurance Act 1995(Cth)ss 190, 191

APRA's position 6 Mr Claxton appeared on behalf of APRA and informed the Court that APRA has no objection to the making of the orders proposed by the applicants, and is satisfied with the proposed steps for notifying affected policy owners of the proposed scheme: cf. Re National Mutual Life Association of Australasia Ltd [2016] FCA 1219 (National Mutual) at [4]. Mr Claxton proposed some minor amendments to the proposed formal notification letters referred to in the applicants' draft orders, which were agreed by Mr Jackman SC, senior counsel for the applicants. 7 In particular, Mr Claxton confirmed that APRA does not consider it necessary for owners of policies referrable to the AIAA receiving fund, being AIAA's Statutory Fund No. 1, to be given an approved summary of the scheme, having regard to the actuarial evidence that the scheme will have a positive impact on the Capital Adequacy Multiple for that statutory fund and the steps proposed to be taken by the applicants to publicise the proposed scheme.

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